Precious metals and bullion products in physical form often have a higher price than the spot-price. The spot-price is the price for which someone can buy certificates or futures on the commodity exchange. It is however mathematically impossible, based on the paper market volume traded, for these so called paper metal products to be fully backed by physical precious metals.Customers can check the price premium by clicking on a specific product in the product overview to reach the product details page where price per gram, price per troy oz, the premium above the spot price and the spread between the buy and sell price are listed.
Price Premium for Precious Metals
There are two components in the price premium for physical gold and silver. The first and most natural part is accounted for in the melt and minting cost. This part of the premium is called the natural premium. The second component is a market premium that arises when the supply and demand in the paper market for certificates and futures doesn’t correspond with the physical market.
Let’s first take a look at the production cost for gold and silver in bullion form. Gold and silver in bullion form is often minted into 1 oz coins or small bars ranging from 1 oz to 10 oz. It is an advanced process to melt, mint and certify bullion products with high quality and precision. Everything from design work to manually engraving stamps has to be calculated in the cost, corresponding to the natural premium. It is therefore normal that a 1 oz coin costs more than 1 oz of the actual metal. Since the spot price for gold is multiple times higher than that of silver, it is also normal that the premium for a 1 oz silver coin amounts to a larger proportion of the price percentage-wise compared to a 1 oz gold coin. The natural premium doesn’t change much over time, and matches the cost of the minting process.
The other part of the price premium is the market premium. This part of the premium reflects the difference between the price of paper metal on the spot market and the price of physical metal on the real physical market. The market premium fluctuates depending on different factors such as:
– Risk of default on the commodity exchanges and thus uncertainty of delivery. The knowledge of the paper market fraud, where more paper metal is available than there are backing of physical metal, is spreading increasingly; – Lack of coin blanks which are stamped to make the coin;
– Lack of production capacity for smaller coins/bars; and – Limited mintage of certain products.
A good example of the effect on the market premium is when the spot price of silver decreased below US$ 10 during the fall/winter of 2008. Premiums on 1 oz coins such as Silver Eagles and other government minted coins then reached 100 %.
Precious Metals Paper Markets
In a functioning market, there would be no such thing as a market premium for physical precious metals. The expression in itself reveals that the “market” isn’t controlled by normal market forces. The commodity exchanges were originally meant to serve producers so they could hedge by selling future metals for the purpose of limiting uncertainty when raising money for production. The commodity markets today are controlled by large banks which trading volumes are much larger than there is backing by physical precious metals.
Knowledge about the paper market bluff is spreading quickly and the market premiums on physical gold and silver will probably increase over time as a result of this. In our debt based money system based on fractional reserves, the money supply must increase incrementally for the system not to collapse. The result is that more and more fiat-money is competing for the same limited amount of precious metals. When enough people request physical delivery of paper metal products, it will be revealed that there is not enough physical metal to back up all the paper promises. Paper metal is created out of thin air and bought by money likewise created out of thin air. Real physical precious metals, on the contrary, can not be created out of thin air but have an inherent value that will persist over time.